Here's Why Suzhou Xianglou New Material (SZSE:301160) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Suzhou Xianglou New Material Co., Ltd. (SZSE:301160) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Suzhou Xianglou New Material

What Is Suzhou Xianglou New Material's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Suzhou Xianglou New Material had CN¥109.3m of debt, an increase on CN¥94.6m, over one year. But it also has CN¥268.9m in cash to offset that, meaning it has CN¥159.6m net cash.

How Healthy Is Suzhou Xianglou New Material's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Xianglou New Material had liabilities of CN¥270.7m falling due within a year, and liabilities of CN¥36.3m due beyond that. On the other hand, it had cash of CN¥268.9m and CN¥472.8m worth of receivables due within a year. So it can boast CN¥434.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Xianglou New Material could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Suzhou Xianglou New Material has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Suzhou Xianglou New Material grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Suzhou Xianglou New Material's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Suzhou Xianglou New Material has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Suzhou Xianglou New Material recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Suzhou Xianglou New Material has CN¥159.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 16% over the last year. So we are not troubled with Suzhou Xianglou New Material's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Suzhou Xianglou New Material (1 is concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.